Macroeconomic Analysis Essay Sample

Introduction
Deciding to start a business is brave and adventurous. The first step to success is a brilliant, viable, profitable idea. Whether you have decided to do it on your own because you are tired of working for someone else, or you are laid off after many years in your organization, before you decide to invest your life savings and get buried in debt, consider the big picture, the current economy, your demographic target consumer and do your research. The idea of solar energy is one such brilliant, viable idea. True the demand is present for such energy, but before taking the leap, consider the market saturation, competition, governmental rules and regulations and other determent factor that will influence the success of your venture.

Determinant Factors

The American Economy

Annual percentage growth rate of GDP at market prices based on constant local currency. Aggregates are based on constant 2005 U.S. dollars. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. The United Stated economy and those of other high income economies are expected to grow by 1.9 percent in 2014, accelerating to 2.4 percent in 2015 and 2.5 percent in 2016.

The Euro Area is on target to grow by 1.1 percent this year, while the United States economy, which contracted in the first quarter due to severe weather, is expected to grow by 2.1 percent this year (down from the previous forecast of 2.8 percent). The global economy is expected to pick up speed as the year progresses and is projected to expand by 2.8 percent this year, strengthening to 3.4 and 3.5 percent in 2015 and 2016, respectively. High-income economies will contribute about half of global growth in 2015 and 2016. (Bank, 2014) As you can see, the economic forecast for the United States is forecasted to rise over the next several years.

Market Saturation

Market saturation is a situation in which a product has become diffused (distributed) within a market; the actual level of saturation can depend on consumer purchasing power; as well as competition, prices, and technology. (Investopedia, 2014) When a product of service is first introduces, the goal is to get in on the ground floor of the idea, before competition enters the market. Most competitors will enter the market and create that same or similar product, good or service with the thought process of making a profit. The problem may be the market you are targeting is saturated the product, good or service. This will cause decrease demand for your product, and a reduction in in profit, if any after paying your overhead. Unless you have the ability to enhance the product and somehow reinvent or upgrade it at a minimal cost to your business overhead while making it affordable for the consumer, you may find your product will not be in demand. You will be fighting to sell in a saturated market. The value of your product will be reduced. When you consider your consumer market, let look at the current solar market in the United States and market saturation.

GDP Target Markets
The United States the top solar states for total power capacity per capita and the top U.S. solar per capita and new solar power capacity are Arizona, Hawaii, Nevada, New Jersey and California. The largest populous state is California that seems to have the largest total solar power capacity, new solar power capacity in the year 2012. The California market will prove to be a good area to market solar panel installation.

California has become one of the largest solar energy markets in the United States due to incentives the state offers for installation of solar panel on roofs of homes and businesses. In addition, government subsidies help to fund installation projects. Choosing to do business in this region will be very competitive, but it seem there is still opportunity in these states. (Wang, 2013)

International trade is another option to consider when looking into marketing a product. Solar energy is a resource that can be utilized by any nation willing to invest in this natural resource. According to the research attained from the EPIA’s 2012 Photovoltaic Barometer report, and data attained from population numbers from Internet World Stats (IWS) and the GDP numbers come from the International Monetary Fund (IMF), the top countries that utilize solar energy Sources are Germany, Italy and Belgium, (Shahan, 2013) whereas the top counties that trade with the United States are Canada, China Mexico Japan Germany and the United Kingdom. (Wikipedia, 2012) Considering the international market would open up additional opportunity to expand your target market. The countries that the United States trade the most with still have demand for solar energy.

Business Cycles
Another important factor to consider when starting a business is the “business cycle.” The business cycle is the fluctuations in economic activity that an economy will experience over a period of time. We have experience may business cycles in the United States. We refer to them as expansions and recessions. In an expansions, the economic outlook is good and growth happens, without inflation. Recessions are when the economy is shrinking and the determination factors for a recession include unemployment, low industry production, decrease sales and lower incomes. Since 1854, The United States has experienced 33 business cycles. Each consisting of expansions and recessions. (The National Bureau of Economic Research, 2014)

The business cycle peaked in late December 2004, and headed downward through January 2006. Increase global economic confidence caused rise in 2007. The cycle continues to lower and raise on a steady basis with 2015 looking very positive. (Now and the Future, 2014)

Unemployment / Inflation
Unemployment is a major determinate factor on the success of a new business venture to the impact unemployment has on the economy. Unemployment rate is defined as the percentage of the labor force that is unemployed. The unemployment rate measures the percentage of the labor force that is unemployed:

Determining the labor force is essential to estimate the unemployment rate in the United States. The labor force is defined as the percentage of the working-age population in the labor force.

The labor force participation rate is important because it determines the amount of labor that will be available to the economy from a given population. The higher the labor force participation rate, the more labor that will be available and the higher a country’s levels of GDP and GDP per person. (Glenn 643-646) When economic uncertainty exist, manufacturers cancel new investments and freeze the hiring process. Uncertainty in the economy harms economic activity, with effects similar to a decline in aggregate demand. Companies cut back on spending which causes unemployment to rise. When unemployment rises, there is a reduction in output. (United States Department of Labor, 2014)

Heightened uncertainty lowers economic activity and inflation, and thus operates like a fall in aggregate demand. During the Great Recession and recovery, we estimate that higher uncertainty has boosted the unemployment rate by at least one percentage point. Policymakers typically try to mitigate uncertainty’s adverse economic effects by lowering nominal interest rates. However, in the recession and recovery, nominal interest rates have been near zero and couldn’t be lowered further. As a consequence, high uncertainty has been a greater drag on economic activity in the Great Recession and recovery than in previous recessions. There is a close relationship between unemployment and inflation. As more people work the national output increases, causing wages to increase, causing consumers to have more money and to spend more, resulting in consumers demanding more goods and services, finally causing the prices of goods and services to increase. This means that unemployment and inflation share an inverse relationship: inflation rises as unemployment falls, and inflation falls as unemployment rises.

International Influence
In this day and age, many countries depend on each other and if one economy suffers, somehow there is an effect on another country. Whether the effects are from a political event or the preference of one currency over another. The United States has a trading relationship with many other nations. There has been an increase in the amount of good imported into the United States over the years, in addition to many goods from the United States that are exported to other nations. To regulate the international trade process, there are polices that promote and restrict the growth ot imports and exports which has an effect on the United States economy. Trade barrier exist that may hinder international trade. One of these barriers is tariffs and quotas.

Trade barrier are often put into place during recessions, or when national unemployment rates are on the rise, or faced with competition from foreign companies, the government will but trade barriers in place to protect the industry to preserve the economy. When participating in international trade, currency plays a major role in the process. The value of currency rises and falls according to supply and demand. In addition, changes in preferences for goods and services in other countries reflects on the supply and demand for different national currencies. A nation’s currency value is influenced by prices of goods and services in the country, the nation’s inflation rate, interest rates and the amount of investment opportunities. The cost of United States investments rise as when the American dollar trades at a higher value that other national currency. On the other hand, if the supply of dollars on the exchange market increased faster than the demand, the value of the US dollar will depreciate and look weak against other currencies.

As of today the exchange rate for one US dollar is highest exchange value is the Japanese’s yen. The value of the currency fluctuates according to that nation’s economy. Currently the US dollar is exchanging at a favorable values. (Oanda, 2014)

Monetary Policy and Interest Rates

On a short term basis, monetary policy influences inflation and the economy demand for goods and services. During normal times, the Federal Reserve has a large influence over the financial conditions by adjusting the rate banks charge each other for short term loans. In addition to the banks benefiting, this low interest benefit is passed on to the households and firms. The goal is to influence firm and household borrowing. Short term loans are more attractive and borrowers feel as if they need to act to lock in the lower interest rate. When short term and long term interest rates decrease, it is cheaper to borrow, the consumer borrow and purchases goods and services, which helps firms justify hiring and increasing the workforce, which boost production. It is interesting to note that the monetary policy influence is not instant and often does not appear immediately, do to measure the effects of the monetary policy on the economy can be difficult to predict. Monetary policy has a considerable significance on inflation.

Federal fund rate reductions result in increased demand for good and serviced and results in a wage and elevated cost, meaning a push for demand for workers and materials to increase production. Predictions can be made for the future of the economy, including predictions on price and wages when monetary policy is used and those expectations also influence the current inflation rate. The most recent monetary influence happened in 2008 when short term interest rates were at zero. When interest rates are at zero, they are unable to fall any lower, therefore the Federal Reserve decided to support the economy by purchasing long term mortgage backed securities in addition to notes issued by certain government-sponsored enterprise and long term Treasury bonds and notes. The goal was to lower the level of longer term interest rates with hopes of improving financial conditions. Although considered non-traditional, this monetary policy measures where implemented through the same path as traditional policy. (Francisco, 2004) Fiscal Policy and Unemployment

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy. It is the sister strategy to monetary policy through which a central bank influences a nation’s money supply. (Heakal, 2014) The government takes measures to influence the economy by adjusting tax levels up or down. The overall goal is to contain inflation and decrease the unemployment rate and keep a blooming value on the US dollar. Recent government intervention and influence on the US economy with fiscal policy is the American Taxpayer Relief Act of 2012. This act of influence was a move to increase tax rates and cut government spending. Government spending contributes to the deficit.

The federal government budget deficit has fallen sharply in recent years―from almost 12 percent of GDP in 2009 to less than 7 percent in 2012. And recent budget reports show that the deficit is shrinking faster than expected only a few months ago, to a projected 4½ percent of GDP for the current fiscal year, which ends September 30. Plus, health care cost growth has slowed down dramatically since the Great Recession, alleviating the pressure on public health care programs at least temporarily. (Igan, 2013) Deficit reduction is the primary goal of fiscal policy. It is believed that a lower deficit will reduce government borrowing which will have an effect on interest rates. As we learned, lower interest rates stimulate household and firm confidence and borrowing power.

Firms will hire workers to keep up the demand for goods and services, therefore reducing unemployment. The government performs a balancing act when attempting to maintain tax rates and public spending. If the balance tilts too far in one direction, inflation will rise or if the shift is too far in the opposite direction the value the dollar decrease. Due to this ongoing balancing act the government does use fiscal policy to curve inflation by application of brakes to the economy by increasing taxes to decrease the amount of money flowing into the economy. Government spending is also reduced which decreases the amount of money in circulation. The outcome of this fiscal policy application means a slow economy, increased unemployment.

Demographics

Nothing says economic confidence than a personal investment. By investing your personal savings to start a business in addition to borrowing helps the economy recover. Thank advantage of tax an interest benefits serves to attract small business starts. According to the Biz2Credit Small Business Lending Index, the small business loan approval rates at big banks ($10 billion+ in assets) increased 17.6% in December 2013 from 17.4%. Further, in a year-to-year comparison, lending approval rates at big banks have increased nearly 20%. The recession of affected small business owners in 2009 -2010, however, the 2011 – 2013 banks are confident and are lending to potential borrowers. As a female business owner, it is essential to do your due diligence in researching the best start up opportunities such as borrowing method, institution, market and chances for success. We have learned that the market you target can be national or international, therefore there are many opportunities for success in that arena.

Starting up is the hardest part. According to Biz2Credit,the The Top 25 metro areas by annual revenue were: Jacksonville, FL; Charlotte-Concord-Gastonia, NC-SC; Chicago, IL-IN-WI; Denver, CO; Pittsburgh, PA; Atlanta GA; Los-Angeles-Long Beach-Anaheim, CA; Las Vegas, NV; Dallas-Fort Worth, TX and San Francisco-Oakland CA. Consideration of start up in these locations will provide a good chance of business success. Consideration of the annual revenue of t the demographic area will help estimate the success of the overall economy of your city and the viability of your new blooming business. If you choose to borrow funds, consideration of the credit score of your demographic area is essential as well. When sorted by Credit Score, Portland was the leader. Rounding out the Top 25 were Denver, San Francisco-Oakland, Los Angeles-Long Beach-Anaheim, Las Vegas, New York metro, Chicago, Pittsburgh, Indianapolis, and Seattle. (Biz2Credit, 2014)

Recommendations and Economic Justification

The decision to venture out and be a business owner is one that required considerable thought and planning. Knowing when to get into the market as a small business owner is essential. Having a strong understanding of the national and international economy is essential in order to make intelligent informed decision. Understanding how business cycles work, and the ability to identify a time of expansions and recession will help you identify the best time to go forward with your venture. Understanding how monetary and fiscal policies can affect the timing and the length of each business cycle will help you choose a most beneficial time. During a time of expansion the economy will grow, causing an influx of business and job growth. This is the recommend time to jump into the market. Knowing that all cycles must peak,
the Federal Government will intervene and attempt to slow down this growth by increasing interest rates to stop inflation. Knowing this slowdown will cause the economy to slow down, prepare your business to weather this storm.

Business demand is driven by increasing the income and consumption taxes which directly reflects on the amount of disposable income which slows down business activity. Understanding your market and effectively reaching your consumer with goods and services that are in demand is a determinate factor in for your business success. The correct demographic area to implement your startup venture is key to success. Researching other small business success, longevity is essential to choosing the correct location. In addition, ensuring you are not marketing a product that is currently saturated by competition is another factor of importance. Solar energy is a resource that is very popular. The competition in this area is stiff, but I foresee opportunity in this area a business. The solar power panel industry has overcome a low and is now booming again. There was an oversupply of panels which caused prices to drop, making solar power panels competitive which increased the overall demand. Installations are expected to increase. Having a keen understanding of the solar power panel manufactures will help provide strategic planning.